The biggest change was another lowering of the growth rate. Management now expects to grow revenues by 3%-6% over the next three to five years, lower than the 5%-7% previously expected. While there are some exciting opportunities, growth of 0%-1% in switching and routing is a big disappointment. The EPS growth rate is also lowered from 7%-9% to 5%-7% over the same period.

CEO John Chambers walked through the disappointment from last quarter’s earnings announcement, where emerging markets, service provider, and product transitions cost about $1 billion in revenues. We have done more work on the emerging markets weakness, and our Global Infrastructure Model tells us that Q3 was weak across the board, falling by 9% Y/Y for all telecom infrastructure products.

Our View:
* We continue to focus on Cisco Systems, Inc. (NASDAQ:CSCO)’s growth markets. We believe the data center, wireless LAN, security and services will all show solid growth for the next several years. Visibility into core switching and routing revenues is limited, but we wouldn’t be surprised to see some upside to Cisco Systems, Inc. (NASDAQ:CSCO)’s very cautious target.
* We make no changes to earnings to our $25 price target. We maintain our Outperform rating, but expect the stock to be in a trading range until more visibility on a top-line recovery emerges.